IB Net Payout Yields Model

Will the Market Melt Up?

You can't watch a clip on CNBC or Bloomberg or read an article on numerous websites without somebody talking about a correction in September. Even SeekingAlpha has a focus on buying gold to protect from the 'inevitable' downside. Guess the market got that start on the 1st day with the SP500 down over 2% and then over 0.5% soon after the bell on the 2nd day. Every poll I see the pollsters expect a much larger chance of a large drop rather then a large gain in September. The action on the first just seems overly convenient to suck in the shorts that have been expecting a huge sell off and Monday was there confirmation. But is that what will actually play out?

Watching Fast Money last night I was appalled and then delighted to see that they featured the PermaBear trio of David Rosenberg, Peter Schiff, and Roubini. One decent down day and they pull all the stops on the negative side. Though I do agree with Schiff in that investing outside the US will see better returns he doesn't come off as a bullish investor since he spends so much time hating on the US. Wish he would spend more TV time focusing on the investments he likes outside the US. It almost seems as if everybody on the show has dismissed the possibility of a positive market. That seems almost absurd considering that the average loss of o.9% in September is much better then the 2.2% loss on the first day. The average September would suggest investing now gives you a 1.3% gain the rest of the month.

As we reported back on July 28th in our Chart of the Day [Inverted Head and Shoulders], the huge drop back in September of last year is perfectly set up for a rally back to those levels above 1,200 or 12,000 on the DOW. Very few people expect a rally in this the worst trading month in the history of the markets, but isn't that exactly when it happens. When nobody expects it (or at least very few)?

The economic news of late has been extremely bullish whether it was Intel boosting revenue guidance (wasn't everybody just saying that we can't recover without revenue growth?), or the ISM Manufacturing blowing out estimates to show growth for the first time in 19 months, or more good signs that housing has truly bottomed. Yet the market has sold off for a whopping 3 days and the first question out of every host is whether this is the start of the correction. How about is this a buying opportunity? It is concerning that the market hasn't jumped on this positive data, but its not like the market is down anything material since we're still higher then the August lows around 980. Since the losses so far can be counted as no more then mild, healthy profit taking why is everybody so bearish?

To us it adds up more fuel to the argument that the market could 'Melt Up' as easily as it melted down last year. Other then a few random thoughts on this subject, its very under followed even though the graphs suggest that if the market holds the 980 to 1,000 level it doesn't have much resistance until back in the 1,200 level.

Just as I was wrapping up this report, CNBC had the Trader Talk with Art Cashin and its amazing how the tone was so negative. Rumors about this bank raising capital, or this financial collapse, or some huge commercial real estate mega default. What a coniencidence for that to happen in September. Where there is smoke there can be a fire smoldering, but I just don't buy it. It was more just weak hands selling on fear showing that the market is still too pessimistic. If it keeps up it might become self fulfilling and that is the biggest threat at this point. All economic indicators suggest the rally will continue along with a vastly improving economy. All the leading indicators continue to soar while lagging indicators continue to well lag. Anybody find it ironic that the bears focus solely on unemployment? Don't they sound desperate hanging onto a known fact that unemployment sometimes doesn't bottom until months after the economy bottoms. First Trust had a research report that its usually not until GDP grows at 3% that unemployment perks up. What will the bears do when history repeats?

We'll continue to support the idea that the markets will melt up as the fear of the horrible Sept/Oct period subsides and the bears run out of ammunition. As that happens the technicals will take over and markets could easily rally 20-30% with little resistance until 1,200+. The following table from CNBC has a good summary of the values for an assortment of markets and economic data over the last year. For everybody talking about the SP500 soaring some 50% from the bottom, people need to understand that it now stands some 22% below levels just a year ago (and that level was already down 20% from the highs). Does the rally seem that big when considering the bigger picture?


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